Huge US debt - Americans no longer owe it just to themselves

ByDAVID R. FRANCISFebruary 28, 1984

Boston
— It used to be said that Americans should not be too concerned about the huge federal debt because they owe it to themselves. That's no longer so true. Last year foreigners owned $160.2 billion - or 14 percent - of the total $1.141 trillion federal debt held by the public.

''This is not something that we relish,'' said Treasury Secretary Donald Regan in an interview. ''But it is not a matter of concern at this point. If it goes on year after year, yes.''

In other words, should a greater proportion of a growing national debt be held by foreigners, it could become a more serious international payments burden for the United States.

''That is no big problem,'' commented Martin Feldstein, chairman of the President's Council of Economic Advisers.

For most of American history, federal debt was held almost entirely by individuals and institutions within the US. In 1946, for instance, the debt held by foreigners was about $2 billion, or less than 1 percent of the total debt held by the public. Much of that was held in the official reserves of foreign central banks. By the late 1960s, foreigners held just over $10 billion, still less than 5 percent of the total. Interest paid to foreign nationals, of course, was also a small proportion of the total interest paid on debt held by the public.

Foreign holdings, notes an analysis by the Office of Management and Budget (OMB), began to grow much faster starting in 1970. For a time, West European nations were trying to maintain the price of the dollar by buying dollars on the foreign-exchange markets. These were piled up in their international monetary reserves and invested to a large extent in Treasury securities, described by the OMB study as ''the safest and one of the most liquid forms of holding dollar assets.''

After OPEC tripled the price of oil in 1973-74, several of its member nations had large amounts of surplus dollars to invest in US federal debt.

In more recent years, the OPEC nations as a group have gone into the red in their international payments balance, and have unloaded some of their purchases from the US Treasury. With the dollar so strong, some European and other governments were selling their dollar assets to support their own currencies on the foreign-exchange markets.

At the same time, notes the OMB analysis, private individuals and companies were moving their money into the United States. ''On net,'' it says, ''there has been a large increase in holdings of dollar assets by foreigners, and this is reflected in the further increase in the federal debt held by foreigners.''

Because of rising interest rates, the interest paid on foreign holdings of Treasury debt has grown much faster than did the foreign holdings themselves.

Foreign purchases of federal debt, as a proportion of federal financing needs , have varied sharply in recent years. Foreigners provided $20.9 billion of the

But in 1980, foreigners bought only $1.3 billion of the $70.5 billion of new Treasury debt sold to the public.

Last year, foreigners picked up $18.6 billion of total federal financing needs of $212.3 billion.

Looking at these numbers, Secretary Regan said that foreigners ''are not financing our budget deficit. They may be sending us a lot of excess capital for investment in the United States. But it is not going into Treasury securities. It may be going into real estate. It probably has been going into our stock market, and farmland.''

Dr. Feldstein noted, however, that any foreign investments in the US - of Treasury debts or other private investments - increase the supply of funds. This , he added, would permit the financing of the federal deficit with ''less crowding out'' of private borrowers.

He said the current-account deficit could be about $80 billion this year. This deficit is automatically financed by foreigners. That means they will directly or indirectly be financing about 40 percent of the US budget deficit of perhaps $200 billion.

Will foreigners help finance more or less of the federal deficit by directly borrowing Treasury debt this year?

Mr. Regan said he didn't know. But the weakness of the dollar on foreign-exchange markets in recent weeks may indicate that foreigners are bailing out of dollar assets. If so, American money markets will be more on their own in financing the massive federal deficit and interest rates could rise.